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Tutorial 10_2010_answer_ - ECON1002 Introductory...

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ECON1002 Introductory Macroeconomics, S2 2010 Tutorial Tasks 1 Reading Guide : BOF Chapters 13 and 14. You should also look over your lectures notes for Week 10. Key Concepts: Diminishing marginal productivity , Steady state, Total factor productivity, the Solow Swan model, and Endogenous growth. R EVIEW OF C ONCEPTUAL U NDERSTANDING These are to be attempted before the tutorial. They will not normally be covered in the tutorial, maybe, except for a quick review, time permitting. The answers are typically found in the textbook and lecture notes. 1. What do you understand by the concepts of diminishing marginal productivity and the constant returns to scale? How realistic are they? Are they useful in understanding economic growth? 2. Why do we use per capita production function in the analysis of economic growth? 3. What is the mechanism by which the Solow-Swan model explains economic growth? 4. What is endogenous growth? P ROBLEMS 1. How would you respond to the following argument: ‘Economic theory makes no sense. For example, poor countries have very little capital. But capital has diminishing marginal productivity. So, in poor countries, the marginal productivity of capital must be high. But then if capital is so productive in those countries, why is everyone not there rich?’ The argument is incorrect. A low capital stock does imply a high rate of return for every extra unit of capital, but total income depends not on marginal increments to capita (and output) but on the overall level of aggregate income. And with a low stock of capital, it is unlikely that aggregate income will be high as the economy would simply be incapable of producing a large amount of output. T UTORIAL 10 (Week 11: beginning 11 th October)
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